I want to begin with a short story about a small country. A small country, which has managed over decades to sustain high growth and improve the lives of its people. It is a country that has long seen economic openness as central to its development. It has provided a stable business environment, struck trade agreements with its key trading partners, and attracted investors that have generated large numbers of jobs and fostered innovation in the local economy.
This is not the “Singapore Story” – it’s the story of my home country, Costa Rica, where I was Minister of Trade before coming to the World Bank Group.
What links the stories of Singapore and Costa Rica is that openness to the global economy has always been central to their prosperity.
It is probably no surprise then that for me, and I think for many of us in this room, there is no doubt that trade is a powerful driver of economic growth and poverty reduction.
No country has grown on a sustained basis without trading with others.
Despite this, we are in a challenging global environment on trade, with much debate over the directions the global economy has taken in recent years. Today, we are being challenged to re-examine the evidence on the role trade plays in the global economy.
Trade, Inclusion, and Growth
At the World Bank Group, the evidence is clear: When it comes to trade, we do not need to choose between inclusion and growth.
Trade has been central to the economic transformation of many countries in recent decades, leading to sustained growth and poverty reduction.
- In Vietnam, for instance, extreme poverty declined from 64 percent in 1993 to less than 3 percent today, a period that saw the country’s trade grow to more than 150 percent of GDP.
- In India, with trade in services playing a central role, economic growth of between 6 and 7 percent helped reduce extreme poverty from 50 percent in 1994 to less than 20 percent in 2015.
And these numbers are not just about economics. They are about people. Less poverty means better lives for the men, women and children that call these countries home.
As well as reducing poverty, trade has helped build a more inclusive global economy. Globalization has brought developing countries from marginal to central participants in world trade. Developing countries now account for around one half of global trade – up from around one third in 2000. They absorb close to half of total foreign direct investment.
This same link between trade and global inclusion is evident when we look at global inequality in incomes – in other words, at the gap between the lowest- and highest-income people in the world. Contrary to what is often assumed, according to recent research by the World Bank, global inequality in incomes has declined since 1990 after rising since the 1820s. The causes for this are complex, but economic openness and the global spread of technology has almost certainly played a role.
While trade has promoted a more inclusive global economy, and has helped lift millions out of poverty, we know that some people have been left behind. They are concerned that the rising tide has not lifted all boats. Along with the rapid economic shifts brought about by technological change, and sudden increases in import competition in some sectors and economies, this concern has driven the increasingly vocal concerns we have heard about globalization.
In this context I would like to speak today about the current trade environment, and the challenges that we face in using trade to support growth and reduce poverty. I will then conclude by setting out some ideas for how we can address the challenges faced.
The Global Trade Environment
First, on the global trade environment, there are three aspects to address: the relationship between global GDP and trade growth; the impact of technological change; and the pace of trade liberalization.
The global economy as a whole is in a period of strengthening growth. The recovery in global growth, which has been underway since mid-2016, continued in the first half of this year. The slow recovery in global trade has played a part in this recovery – but it is not the engine of growth that it once was.
In the past, trade was one of the key engines of global growth. In the two decades before the global financial crisis, trade outpaced global GDP growth by some three percentage points.
Several factors drove this trend, including structural reforms that lowered trade barriers, a dramatic decline in communication costs, and a rapid deepening of global supply chains.
Low- and middle-income countries benefited in particular—their trade in the decade and a half before the Global Financial Crisis grew by 9.3 percent, 2.5 percent higher than world exports, making trade a powerful driver of inclusive development.
But the trade-growth engine has been sputtering since the global financial crisis.
This recent weakness in trade growth is linked partly to short-term economic trends like lower commodity prices, as well as longer-term trends, like the maturation of global value chains. Unpacking the causes is complex, and has been a focus for research at the World Bank.
But the story of the trade slowdown is not just about longer-term trends: Policies also have a key role. I will come back later to the need to implement policy reforms that allow trade to take on a more a central role in global growth.
A second key element of the trade context is the impact of technological change on the global economy and on trade.
Two weeks ago we launched a new report on the Future of Manufacturing. The spread of global production networks in manufacturing – the associated linkages with economies that this generated – has been a key driver of global trade and of development in recent decades.
Lower-income countries have relied on manufacturing, which provides jobs for unskilled workers, helps increase productivity, and drives economic growth, as a central driver of development.
However, the increasing adoption of industrial automation, advanced robotics, smart factories, the internet of things, and 3D printing are transforming the manufacturing process.
Although dramatic, media reports of massive job losses due to automation may be overblown in developing countries. In fact, according to the report, the threat of automation to today’s jobs may be a relatively modest two to eight percent for developing economies.
Nevertheless, there is no doubt that technological change is already bringing major changes to the global economy – and these are likely to intensify. The structure of global value chains is evolving, in part due to these technological shifts, which have made domestic manufacturing relatively less costly.
A third key element of the global context is the weak prospects for trade liberalization at the global and regional levels.
Here, I think it is useful to turn our minds back to early 2016.
In Nairobi the WTO had just held its second successful Ministerial Conference in a row, following success at Bali in 2013 when the Trade Facilitation Agreement was concluded. In Nairobi multilateral decisions were reached on long-standing issues like ending agricultural export subsidies. The way ahead in the WTO was not simple, but momentum had been achieved through two successful Ministerial Conferences following years of deadlock on the Doha Round.
Back in early 2016, there was momentum on plurilateral initiatives like the Trade in Services Agreement and the Environment Goods Agreement, building on the success achieved at Nairobi in expanding the Information Technology Agreement plurilateral.
Perhaps most notable was the February 2016 signing of the Trans-Pacific Partnership. We all know the different circumstances the TPP finds itself in now.
Today, we are looking at a very different picture. Despite the success of the WTO Trade Facilitation Agreement entering into force, there seem to be few prospects for multilateral deals at the WTO. The plurilateral initiatives have stalled; and the TPP has not entered into force.
This snapshot of the last 18 months is in fact reflective of a longer-run trend of diminished trade liberalization since the early 2000s.
Diminishing Trade Liberalization
In the 1990s and early 2000s, reforms related to WTO membership allowed countries, most notably China, to rapidly integrate into the global trading system. This was also a period when global supply chains were rapidly spreading in Asia, Europe and North America.
Applied tariffs fell from averages of nearly 30 percent to less than 15 in emerging and developing countries and from 10 percent to less than 5 percent in industrial countries. Since the early 2000s, the pace of liberalization slowed significantly. There was almost no further reduction in tariffs in advanced economies and less than a third the reduction in emerging and developing economies than took place between the early 1990s and early 2000s.
So, despite trade’s central role in the global economy, we find ourselves in a time when there is not the energy in trade liberalization that there once was.
The lack of momentum in the last 18 months or so is particularly acute – but it also reflects a longer-term slowing of momentum since the early 2000s.
Putting the Trade in Context
Despite all this, we need to put in context the slowdown in trade; the challenges posed by rapidly changing technology; and the relative loss of energy in trade liberalization.
Recently, some commentators have spoken of a risk of “de-globalization.” We should not be complacent, but when we remind ourselves of the wider context, this seems extreme. Trade and investment are still central to the global economy.
Since 1950 the share of GDP made up by trade and the volume of world trade have increased significantly. In 2015, global merchandise trade in value terms was $16.4 trillion –in volume terms, this is more than 3 times larger than in 1990. Foreign direct investment, increasingly intertwined with trade, has grown almost seven-fold during this period.
As I said at the outset – this has been coupled with a much greater participation of developing countries in the global economy, and rapid declines in poverty.
Globalization is here to stay – but the slowdown in trade growth and in trade liberalization point to the need to do more if we are to unlock its full potential for re-energizing global growth and reducing poverty.
Overcoming the challenges faced
I would like to touch on four ways in which I think we can address these challenges: reinvigorating trade cooperation; bringing about the next wave of developing country integration into world trade; strengthening our focus on inclusion; and improving competitiveness.
The first priority needs to be reinvigorating trade cooperation.
At the multilateral level, as I mentioned earlier we have had consecutive WTO Ministerial Conferences in 2013 and 2015 that delivered significant results, even if they fell short of the expectations that once existed for completing the Doha Round. Although the multilateral climate is difficult, there is an urgent need to define a new path forward in the WTO. This should be focused on achieving results, both on long-standing issues where trade barriers remain high, like agriculture, as well as in new areas like the digital economy.
Regional trade agreements are also essential, complementing multilateral trade opening through the WTO. Although the TPP remains in limbo, its implementation has the potential to inject much-needed growth into the global economy by lowering trade barriers in important economies. There is also the potential for new members to join the agreement, or to implement the standards set in TPP. Other large agreements like the Regional Comprehensive Economic Partnership negotiations have an important role to play. In order to maximize the positive impact of these RTAs, they should remain open and inclusive, and focused on extending the benefits of open markets to as many economies as possible. They also need to be comprehensive in their approach, because the evidence is clear that deeper integration between economies, especially in areas like regulatory cooperation, leads to greater trade and investment.
Although the plurilateral trade services and trade in environment goods negotiations have stalled, as I mentioned earlier, this type of negotiation involving less than the whole WTO Membership can present a way of advancing into new areas of trade rule-making. The aim of new plurilateral negotiations should be extending the benefits of any new agreements to all WTO Members.
Second, I believe that we need to bring about the next wave of developing country integration into world trade.
Bringing many emerging and lower-income economies into global trade has been an important source of growth and dynamism in recent decades.
Trade has been central to the remarkable declines in extreme poverty in Asia.
In the period that this region was rapidly integrating into the global economy, the number of extreme poor living under $1.90/day fell from 966 million in 1990 to 71 million in 2013. In South Asia, the number of extreme poor fell from 505 million in 1996 to 256 million in 2013.
However, low-income countries as a group still face trade costs that are around three times higher than advanced economies. These high trade costs mean that firms that might otherwise trade and invest in these markets of more than 600 million people go elsewhere.
The reasons vary, but include poor road networks, weak logistics, inadequate port facilities, antiquated customs procedures, corruption at border crossings, and outdated legal and regulatory structures. Lowering these trade costs would make firms in developing countries more competitive, allowing them to benefit more from trade opportunities.
Reforms in areas like trade facilitation, which involves streamlining border clearance procedures, can be an important way of reducing trade costs.
In Cambodia, through reforms to improve transparency and strengthen coordination among border agencies, the country cut border clearance times from 6 days to 1.4 days over just a few years, climbing more than 40 places in the Bank’s Logistics Performance Index. This supported Cambodia’s growing export competitiveness in manufacturing.
Lowering trade costs also means improving infrastructure alongside reforms to open markets and streamline trade.
Better roads and rail, upgraded ports and airports, and investments in ICT infrastructure are all essential. However, there has been a growing awareness that the infrastructure deficit in developing countries is well beyond what can be met through public financial institutions like the World Bank Group. Although we are bringing ever-greater financial resources to bear, like our record $75 billion replenishment of the International Development Association, our fund for the world’s poorest countries, we also need to make sure that every dollar goes further.
Our approach to infrastructure financing is to use our resources as effectively as possible to crowd in private financing. This means investments like our support for power generation in Turkey over a decade, where $5 billion in Bank Group commitments helped unlock $55 billion in private investment. It also means intensifying our support to improve the investment climate in developing countries to lower the risks faced by private investors.
These are the core elements of a strategy to bring about the next wave of developing country integration into world trade, through reducing trade costs.
The third broad response to the challenges facing globalization is to strengthen our focus on inclusion. We need to make sure that all groups are connected to the potential benefits of trade, and that when people experience negative impacts, these are addressed.
Although trade and investment liberalization have overwhelmingly positive effects overall, they do come with negative consequences in some cases – for specific industries, specific regions, specific groups. Aside from the negative impact of these costs, if left unaddressed, these costs can sap public support for policies of openness.
As we look to the next phase of globalization, we will need to sharpen our understanding of what does and doesn’t work in implementing policies of adjustment. We have some examples of what seems to work well – the model of flexible labor markets and strong unemployment benefits in Denmark, for example – but far more examples of adjustment policies that are ineffective.
This is an especially big problem for developing countries, which are the least equipped to manage processes of trade adjustment.
In addition to adjustment, we need to focus on connecting more people to the potential gains of trade. This includes people in isolated rural communities; those working in the informal sector; and those in fragile and conflict-affected states.
- The agenda to connect women more fully to the benefits of trade is especially important. Trade has brought real benefits for In Cambodia, the export-oriented garment sector is one of the main providers of wage employment, and 85 percent of total garment industry workers are women. Women in the garment sector receive relativley higher wages than those employed in other sectors.
- Girls in Indian villages where business process outsourcing increased employment among young women, were more likely to be in school than girls in villages where there were no such links through trade. By contrast, such trade links did not affect the probability of boys being in school.
- And across developing countries, exporting firms generally employ a significantly higher share of women than non-exporting firms.
- However, women continue to face significant inequality of opportunity, both within and outside the household, which can make it difficult to gain from trade opportunities.
For example, as much as 85 percent of small-scale traders at borders in Africa’s Great Lakes region are women – but the majority of border officials are men, with corruption and gender-based abuse common.
Other types of gender inequality can affect the gains women experience from trade – like the segmentation of women into certain occupations. In one World Bank Group report we found that women in the horticulture sector in Honduras were workers, but seldom owners of land. While women might be employees at call centers in Egypt, they are rarely managers. Women in Kenya’s tourism industry might clean hotel rooms but they almost never hold the more lucrative job of safari guide.
Strengthening the legitimacy of trade openness– and more importantly maximizing the economic gains – means addressing these barriers that limit women from participating more fully in the benefits of trade.
Finally, I think we need to do more to build competitiveness alongside reforms to open markets.
This agenda encompasses a range of “behind the border” policy areas like innovation and entrepreneurship; or skills and education. Investing in these is essential for boosting productivity and ensuring that businesses can take advantage of the opportunities presented by openness.
A strong focus on pro-competitiveness reforms also helps economies build the resilience they need to respond to economic change, whether brought about by trade, technology, or other shocks.
Experience teaches us that open, growing economies where new jobs are created are much better equipped to deal with adjustment than those that are uncompetitive and stagnant
By working more across these four areas – reinvigorating trade cooperation; bringing about the next wave of developing country integration into world trade; strengthening our focus on inclusion; and improving competitiveness – I believe that we can set a path for the next phase of globalization.
Our goal in all this is not to unlock new drivers of globalization or boost trade as ends in themselves. As the stories of Costa Rica, Singapore, and many other countries show, openness to the global economy is indispensable. If we are to continue growing the global economy; creating jobs; and reducing poverty; then globalization is the only answer.